Why smart money was buying the debt-ceiling uncertainty last week

Free After-Hours Analysis:

Our politicians finally did their jobs and reached an agreement to lift the debt ceiling. No one is happy about the proposed deal, but that’s why it’s called compromise.

And since the looming debt ceiling was the biggest worry hanging over the market, stocks finished Tuesday’s session…flat. Funny how that works.

But that doesn’t surprise readers of this blog. This lethargic reaction to good news happens so often it has become a market cliche: ” Buy the rumor, sell the news.”

Anyone waiting to buy the news of a debt deal is waaaay late to the party because all of the profits were collected last week when the outcome was far from certain. This is why I was telling readers to buy last week’s dip on Wednesday:

As for what comes next, expect the choppy, sideways trade to continue. We’re not going anywhere, but that won’t stop impulsive traders from jumping from one side of the boat to the other.

Until further notice, we keep trading against these swings. That means this week’s swoon is a buying opportunity.

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Of course, now that we are 100 points higher, the risk/reward flipped against us. The easy profits are behind us and we are more vulnerable at the upper end of the recent range.

This is the time to be taking profits, not chasing an imaginary breakout. Feel free to leave some money in the market, but make sure we lift our trailing stops to protect last week’s profits. And as always, taking some worthwhile profits proactively is never a mistake. Remember, we only make money when we sell our winners.

As for what comes next, this week’s break above 4,200 could trigger a short squeeze up to 4,300. That’s not the most likely outcome, but it is certainly a possibility. If prices rally on Wednesday, buy back what we sold on Tuesday and ride that wave higher. But most likely, not much will happen, and that means we waiting to buy the next dip under 4,200.

It makes no difference to me what happens next, only that my trading plan will be ready when the next profit opportunity comes along.

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